European Central Bank council member Jens Weidmann said policy makers are already discussing ways to withdraw some of the emergency cash they injected into the banking system to fight the sovereign debt crisis.
“All council members are aware that non-standard measures create risks and have to be unwound,” Weidmann, who heads Germany’s Bundesbank, said at a press conference in Frankfurt today. “We need this discussion and it is taking place. The timeframe depends on several things, including how the environment develops.”
The ECB has loaned banks more than 1 trillion euros ($1.3 trillion) for three years at its benchmark rate, which is currently at a record low of 1 percent, swelling its balance sheet to more than 3 trillion euros in the process. The Bundesbank has set aside an additional 4.1 billion euros to cover risks stemming from the ECB’s crisis-fighting measures, which include 218 billion euros of government bond purchases.
Weidmann wrote a letter to ECB President Mario Draghi about the risks the central bank is taking, fueling speculation of a rift. He said today he has a “good relationship” with Draghi and doesn’t feel “discouraged or isolated” on the ECB’s 23- member council. The “risks and side effects” of the ECB’s three-year loans “are known to colleagues,” he said.
“It’s important to reduce the dependency of banks on central-bank funding,” Weidmann said. “With a three-year tender it is a bit more complicated, but we have instruments to absorb liquidity. We have to have this discussion, which instruments we can use in this situation.”
The ECB currently takes seven-day term deposits from banks each week to withdraw the liquidity created by its bond purchase program. It could use similar tools, such as issuing short-term bills or certificates, to drain additional cash from the system.
While Weidmann said it’s “important that we develop a concept” for an eventual exit from liquidity measures, he refused to be drawn on the tools the ECB might use in an interview with Bloomberg Television.
“That’s a discussion we should have within the Governing Council, not in front of TV cameras,” he said. “We do have instruments to take out some of the liquidity, but I don’t want to discuss single instruments.”
Weidmann suggested the ECB could raise interest rates if inflation pressures increased. Rising oil prices are stoking inflation, prompting Draghi to say last week that short-term risks to price stability have moved to the upside.
Draghi said in Paris today that while inflation risks “are not materializing at the present time,” the ECB is “continuously alert” and “all the necessary tools to address potential upside risks to medium-term price stability are fully available.”
“We have a clear mandate and a clear hierarchy of our goals, and the first is to maintain price stability,” Weidmann said in the interview. “We’re determined to do so. You can be assured we will react if inflation pressures arise.”
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